Gasoline prices posing inflation risk to economy

Tuesday, May 22, 2007

By STAN FREEMAN

sfreeman@repub.com

The price of gasoline in the Connecticut River Valley has
shot up nearly 90 cents a gallon since February.

Nationally, the price has reached a record high - $3.20 a
gallon on average yesterday - surpassing the peak of the
spike after Hurricane Katrina in 2005. In fact, adjusted for
inflation, the national price now exceeds the price spike of
1981 brought on by the Iran-Iraq war.

Economists fear that if the cost of fuel stays too high for
too long, the entire economy could feel the impact, through
increased inflation.

"All prices will be affected," said Diane P.
Flaherty, chairwoman of the economics department at the
University of Massachusetts in Amherst.

"Surcharges were added by Papa John's and Pizza
Hut in response to rising gas prices in 2005. This also
shows up clearly in airline ticket prices, which add a gas
surcharge, and in the prices of companies like FedEx and
UPS," she said.

Consumers can't easily respond to high gas prices by
driving less, she said. "Demand for gasoline is very
insensitive to price increases because gasoline is largely a
necessity."

Instead, they react to elevated prices at the pump by
cutting other kinds of spending, which affects the overall
economy in yet another way, Flaherty said.

"A study in Chicago a couple of years ago found that
as gas prices rise consumers cut back most on their
consumption of ... durables - big-ticket items like
appliances and cars," she said.

According to AAA, which surveys gas prices at more than 85,000 service stations nationwide each day, the average price of gasoline yesterday in Greater Springfield was $3.06 a gallon. On Feb. 9, the average price was $2.19 a gallon. The record high in the area is $3.20 seen on Sept. 7, 2005, just after Hurricane Katrina struck....